Continental/United Merger FAQs

1. United and Continental have been touting their 10 combined hubs, I can’t figure out what those would be. Do you think they will keep them all?

The combined hubs would be Newark, Washington DC, Cleveland, Chicago, Houston, Denver, San Francisco, Los Angeles, Guam and Tokyo. Of these hubs, Cleveland is probably the one most at risk, being situated, as it is, between Chicago, Washington DC and Newark. However, given the historical capacity constraints in both Chicago and Newark, having a mini-hub for traffic into the Midwest may continue to make sense. We would be surprised if we were to see a lot of emphasis on Cleveland as an international gateway going forward.

2. Do you anticipate that the Continental United merger will put pressure on other carriers to merge?

The obvious answer would be yes, American and US Airways. Several thoughts come to mind. First is that both carriers start to appear relatively small by comparison to Delta and United. The biggest complication may have to do with the ongoing approval process for the American/British/Iberia JBA. On the other hand, don’t forget the previous relationship between British Airways and US Airways, during which BA took an equity stake in US Airways. While that relationship fell apart years ago, there is still some compatibility between their route structures (US having ceded several international routes to BA with the idea that they could feed traffic). Overall, the US Airways and American (and British Airways) networks fit together pretty well.

3. Do you think that United Continental will receive the necessary DoT and EU approvals to merge?

Given the continued economics of the airline industry, there seems to be a ongoing level of support for joint ventures, anti-trust immunities and even mergers on the part of the government, unlike ten years ago, when airline mergers were viewed as inherently anti-competitive.

At the same time, one of the concerns that the government may have is whether a small number of mega-carriers may become the next candidates for too-big-to-fail. Fortunately (or not), we have plenty of experience now with airlines going through successful bankruptcy and restructuring, so this may not be the concern that it was in the past. Overall, Delta-Northwest, Continental-United and American-US Airways actually come out as fairly evenly balanced, and reasonably competitive carriers, so we believe it is likely that this, and any other anticipated mergers would get the necessary approval.

One of the wild cards in all of this will be the negotiation of the next phase of US-EU Open Skies, and whether the US will allow foreign investment in US carriers.This would allow for an American-British, Air France-Delta or Lufthansa-United mega-merger. At this point, I wouldn’t lose a lot of sleep over any of these.

4. What impact will this have on corporate contracts?

With Continental’s movement into Star Alliance last year, and the AC/CO/LH/UA transatlantic joint venture, more companies have moved into situations where they have agreements with both CO and UA today. In many cases, pricing and targets have already been harmonized. For companies that only have agreements with one carrier or the other, they will be forced to expand that relationship or drop it altogether. For example, a company that has an agreement with Continental and American may not be able to add legacy United into the mix and still keep American satisfied, and they may be forced to choose American over Continental (maybe with US Airways in the mix).

Given then increased “footprint” that these mergers and joint ventures have created, it is increasingly likely that companies may be forced to negotiate deeper into the details of individual agreements than just between agreements; in other words, not accepting all of the terms and conditions of an integrated merged-airline or joint-venture proposal.

The other reality is timing. Even if this goes as smoothly as possible, the actual merger isn’t scheduled to take place until the end of the year and a single operating certificate isn’t expected until early 2012. That gives companies two years before they’re forced to take action.

5. What impact do you think this will have on alliances?

Prior to these recent mergers, and airline joint ventures, we were seeing airlines really pushing their alliances as ways in which they could improve their leverage. However, the mergers and joint ventures have given the carriers a lot of the leverage they need and, in many cases, we’re seeing the airlines push back against companies that are contemplating alliance contracts. Going forward, we think we’ll only see alliance deals where there’s really an overwhelming benefit for both corporation and the airlines involved, and not as many of those that are only marginally beneficial. Overall, we think the airlines have come to realize that alliance agreements can result in a lot of incremental work with only a marginal amount of incremental benefit.

6. Won’t this just drive fares up? Isn’t that what mergers are all about?

United and Continental are forecasting that the merger will bring about $1.0 - 1.2 billion per year in synergies, including $0.8 - 0.9 billion in “revenue synergies.” One could be somewhat cynical and think that these are from markets where United and Continental would no longer be competing (i.e. UA-hub to CO-hub). but they do maintain that these will come mainly from improved access to each other’s network (i.e. United to Houston to Latin America, Continental to San Francisco to Asia) and the like. They also point out that they compete with low cost carriers in 92% of their top 50 combined city pairs - i.e. Southwest and the like will keep them honest. On the other hand, it’s no secret that “consolidation” and “capacity reductions” are just synonyms for reducing supply and hoping to drive prices up. We’ll see.